Is my company insolvent? How can we tell?

17 June 2008

Worried about insolvency? Are you asking is my company insolvent or is my business insolvent?

Common man in the pub tales often apply here!. The expert in the pub often says if your company is insolvent you cannot run another company! Bollocks to that.

Here are the three tests of insolvency for any business to apply. if you want to know more please visit our more detailed guide on the following page https://www.companyrescue.co.uk/company-rescue/guides/insolvency-test

The Cashflow Test:

Simply - can the company / business pay its debts when they fall due for payment? For example if you are not paying the deductions from employees for NIC and Income Tax across to the Inland Revenue on the 19th of the month following the month they were deducted, then the company could be insolvent.

If your trade creditors sell to you on say 30 days terms and you regularly pay on 90+ days, then the company could be insolvent.

A director has a legal requirement to understand this issue. If he or she believes that the company has insufficient cash to pay its liabilities on time then they must take advice/action.

The Balance Sheet Test:

Simply - do you owe more than you own as a company or are the company’s assets exceeded by its liabilities?

If yes, then the company could be insolvent. It is important to point out that this test should include contingent or prospective liabilities. (If you need advice on these issues email us).

Many directors tell us that on a balance sheet test the company is not insolvent therefore they do not need to act. However, under the cashflow test above the company may still be insolvent. So you must act if it is.

In our experience an apparently solvent balance sheet may include items that are overstated, such as obsolete stock and work in progress, or debtors that are not really collectable.

After deducting these items many balance sheets become insolvent. So be prudent - you are legally required to present accounts to show a true and fair picture of the business.

Legal Action Test

If a creditor has obtained a County Court Judgment, this may demonstrate the company’s insolvency and the creditor may petition to wind up the company. (See compulsory liquidation).

If a creditor has obtained a statutory demand for greater than £750 and it remains unpaid for more than 21 days, then the creditor may petition to wind up the company. (See compulsory liquidation).

If you believe that any of the above tests are positive for your business, it is vital that you and the board of directors take action to address the insolvent position. However, don’t panic, look carefully at all pertinent issues and consider the taking advice from us.

Adage for the day.... if you have a pain in the chest you don't visit the undertaker do you? So if you have an insolvent but viable business call the heart surgeon (me!) on 07974 086779!

That's all for today.